COVER STORY: by Patrick J. ByrneNews Weekly
Is Malcolm Turnbull out of his depth?
, February 3, 2007
Failure by governments, both federal and state, to come to grips with the complex nature of water risks putting the best regions of Australia's agriculture in permanent drought, writes Patrick J. Byrne.Even after the rains come and the drought breaks, many farmers will face permanent drought, a man-made drought because of the water-trading policies of the federal and state governments.
Last Melbourne Cup day, the Prime Minister, premiers and then federal parliamentary secretary for water (now Environment Minister) Malcolm Turnbull, met to consolidate the National Water Initiative policy of water-trading as the solution to Australia's water shortages. This fateful policy will allow desperate farmers to sell their permanent irrigation water rights from their farm, leaving their farms "dry".
This water can be permanently sold out of irrigation regions and between states to other farmers, industries, towns and cities for environmental use or to water-traders.
Permanent water-trade should be distinguished from temporary trade, where a farmer sells his unused irrigation water to another farmer for one season only, while retaining ongoing ownership of that right. This sensible policy maximises production by maximising water use.
When the problems of permanent water-trading have been put to Malcolm Turnbull, he has consistently replied: "When a commodity such as water is so scarce, the key is to let the market work. And that will lead to the most efficient use of water." (Bendigo Advertiser,
October 20, 2006).
Leaving the primary allocation of water between sectors of the market is fundamentally flawed. It assumes that the water can be traded in the free market, just as we trade cars, houses, food, or clothes - commodities that economists call private goods.
In reality, water is more akin to public goods, such as the army, police, lighthouses, parks and gardens - things that governments provide because they are needed but which cannot be provided by the private sector.
Water is a complex beast. It's what economists call a mixed good. When it is temporarily traded between farmers in an irrigation district, it is akin to a private good. But when governments provide environmental flows to make for healthy waterways, it is a public good.
The complex nature of water is confirmed in research papers from the UN Food and Agricultural Organization (FAO) and the World Bank.*
The FAO argues that "water is in many respects a classic non-marketed resource … decisions concerning water allocations are guided not only by concerns of economic efficiency but also considerations of equity, environmental protection and social and political factors, to name but a few".
The World Bank agrees: "It is difficult to treat water like most market goods; water is broadly perceived as a public good, and large-scale water development is generally too expensive for the private sector …."
"The state's role is particularly strong in inter-sectoral allocation [between cities, farms, industrial and environmental uses], as the state is often the only institution that includes all users of water resources, and has jurisdiction over all sectors of water use …."
Yet Australian governments are trying to hand responsibility for the allocation of water between sectors to the markets. It will lead to what economists call "market failure", as argued in the book High and Dry: How free trade in water will cripple Australian agriculture
, by Patrick J. Byrne and others (Freedom Publishing), now into its second printing.
For example, water-trading was supposed to see water traded from low- to high-value agriculture. Over the past few years, under limited permanent water-trading, nearly all the water traded from farms in northern Victoria has gone to managed investment schemes (MIS), large corporate investment schemes in agriculture. Here, investment is driven not by market forces but by major up-front tax breaks for wealthy investors.Over-production
MIS are causing over-production, turning today's high-value farm products into tomorrow's low-value products, busting some industries and putting other farmers out of business.
Another serious market failure is the "stranding of assets". An irrigation channel may service 30 farms. If half the farmers sell off their water rights, the channel becomes uneconomic, and no water is put down the channel, forcing the remaining farmers (innocent third parties) out of business with no compensation.
A third problem is that the simplistic "economic efficiency" approach conflicts with other economic objectives, such as providing low-cost food to consumers as well as helping farmers compete on heavily subsidised world markets. To achieve these objectives, low-cost irrigation water is essential. However, in an open market, cities will always outbid farmers and force up the price of water.
It seems that policy-makers have regarded water-trading as just another step in economic deregulation and have failed to come to grips with the nature of water.
Further, policy-makers have confused the World Bank's position on water. While it has promoted privatisation of city water, it has made clear that the primary allocation of water between farmers, cities, industry and the environment has to be undertaken by governments, not by markets.
Unless the new Environment Minister Mr Turnbull and the states come to grips with the complex nature of water, blind faith in market forces will put the best regions of Australia's beleaguered agriculture into permanent drought.- Patrick J. Byrne.* REFERENCES:
Ariel Dinar and Mark W. Rosegrant, Water Allocation Mechanisms: Principles and Examples
(Washington DC: World Bank, 1997).
Kerry Turner, et al., Economic Valuation of Water Resources in Agriculture
(Rome: FAO, 2004).
Patrick J. Byrne, Neil Eagle, John O'Brien and Daryl McDonald, High and Dry: How free trade in water will cripple Australian agriculture
(Melbourne: Freedom Publishing, 2006). Softcover: 74 pages. Available from News Weekly
. Rec. price: $15 (+ $4 postage).